Despite the tepid pace of hiring, companies continue to generate higher profits from relatively flat revenues. Much of those gains have come from the even slower pace of wage growth, as business managers squeeze more work out of their existing staff.
Earlier in the recovery, some of that increased productivity was generated by heavy investment in new equipment and technology. But business spending on equipment and software slowed sharply in the first quarter, growing at only a 3 percent annual rate after a brisk 11.8 percent pace in the fourth quarter.
Aside from the direct drag of higher taxes and tighter government spending, the ongoing political gridlock in Washington continues to weigh on business confidence. Many managers say they're reluctant to hire, borrow and invest to expand capacity until Congress and the White House break a long-running standoff over reforming tax laws and restructuring entitlement programs like Medicare and Social Security.
"I think the U.S. economy could bust out of the 2 percent kind of funk we're in right now, if we'd make some decisions in Washington," UPS CEO Scott Davis told CNBC. "We have a huge amount of small business commerce as our customer base. They're sitting on their hands. They're not hiring people, not making investments, until they understand the rules of the road."
Consumers again helped the economy move forward as the new year got underway. Households boosted spending at a 3.2 percent pace, the fastest since the fourth quarter of 2010.
But it remains to be seen whether that strong pace of consumer spending, which makes up more than two-thirds of economic activity, can be sustained later this year. Households relied heavily on savings to pay for purchases in the first quarter, after a payroll tax hike took a big 5.3 percent annualized bite out of incomes, the biggest such drop since the third quarter of 2009.
After sharply boosting savings and paying off debt since the end of the Great Recession, households are apparently dipping into savings again to make up for the income lost to this year's payroll tax hike. Friday's report showed the savings rate dropped sharply to 2.6 percent from the 3.9 percent average rate last year.
Consumers will continue to struggle until the job market improves and employers begin raising wages again to keep or attract good workers.
But consumer spending may get a lift later in the year if housing and stock prices continue rising, creating what economists call a "wealth effect."
"(The stock market and housing market) are going to be boosting consumer spending later this year," said Dean Maki, chief economist at Barlcays. "That's how we get up to 2.5 percent growth rate as we head into next year."